Too Early To Call A Market Bottom, Say Julius Baer And JPMorgan
Emerging markets, particularly India, are poised to outperform because of the recent crash in oil prices.
The precipitous fall in global equity markets may not be over yet as the highly infectious Covid-19 spreads outside China, according to Bank Julius Baer and JPMorgan Chase & Co.
“My assessment is that we probably have more downside. While the virus has been contained in China and it looks like it is coming under control in some of the other countries that were early to get hit like South Korea, it’s clearly going to ramp up in Europe and the U.S.,” Mark Matthews, head of research for Asia at Julius Baer, told BloombergQuint.
The novel coronavirus, which broke out in China at the end of 2019, has now spread to over half the countries around the world, threatening to stall growth. While the number of cases climbed past 1,000 in the U.S., the virus infected more than 10,000 in Italy—resulting in the first-ever attempt at a nationwide lockdown. The outbreak, coupled with a pricing war in the crude oil market, has pushed equity markets globally into a free fall.
Nobody really knows where the bottom is for equity markets, said James Glassman, managing director, and head economist at JPMorgan Chase. “We saw the problem deteriorating in China,” he said. “We knew by early February that was beginning to crest, so you could anticipate that eventually, this was going to be coming off. We don’t know that yet [in Europe and in the U.S.]. It is still too early in the game.”
Policy Measures And Their Impact
U.S. equity markets rebounded sharply on Tuesday after President Donald Trump promised a major economic aid package. The three averages gained nearly 5 percent in anticipation of the support measures. The U.S. equity futures, however, fell again and Asian markets slumped after Trump failed to show up at a White House briefing on the outbreak.
“It’s very difficult to get a big package through a political process as you know. And if this virus goes the way of most flu viruses, settles down in a couple of months, by the time they get these packages together it comes way after the fact,” said JPMorgan’s Glassman.
Richard Harris, chief executive at Port Shelter Investment, expects the situation to be more grim. U.S. authorities, he told BloombergQuint, seem to be “at sixes and sevens”.
They don’t really seem to have a particular policy; don’t seem to know what they’re doing. They seem to be fighting a rear-guard action and Trump’s tweets are really not helping because on the one hand they seem bullish and on the other, there seems to be no action following that up. So, I think the sentiment coming out of the White House is poor.Richard Harris, chief executive, Port Shelter Investment
Governments are likely to come up with a lot of fiscal support, which in turn will add to the debt burden that will have to be unwound at some point, Harris said. But it will be more important to focus on what policymakers do, rather than what they say, he said.
Attention will also turn to the U.S. Federal Reserve, which meets next week to decide on monetary policy. Earlier this week, the U.S. yield curve fell below 1 percent for the first time in history on rising expectations that the Fed will cut policy rates to zero over the next few months to support growth.
The low Fed funds rate, according to Julius Baer’s Matthews, is the key differentiator between the present and the 2008 financial crisis. “So, that is supportive for risk assets, but the fact that interest rates are so low could also be construed as a negative. You could say it shows there’s something really wrong with the world when the 10-year treasury is at 0.5-0.6 percent.”
And I think one big risk is now that this whole thing has happened with the selloff, we do see some of the pipes that deliver liquidity to the financial markets and therefore to the economy somehow become messed up. And you can get signals that might be happening in the credit markets when you look at the credit derivative swaps and the spread between the investment grade and the high yield—they’re starting to go up.Mark Matthews, head research Asia, Julius Baer
Emerging Markets Can Outperform
Emerging markets, particularly India, are poised to outperform because of the recent crash in oil prices, both Matthews and Glassman said.
“One good thing is that the dollar has gone down a lot and it will continue to go down a lot. And the oil price is good for emerging markets like India. So, there are definitely supportive factors to emerging markets,” said Matthews. “I actually think that emerging markets could outperform, which they certainly didn’t do in 2008. But in 2008, they’d already gone up a lot. The emerging market complex has underperformed the S&P 500 for sure over many, many years. So it could outperform.”
Matthews, however, cautioned that the S&P 500, as the bellwether for global markets, could curtail any major rallies in emerging markets if it falls too much.
Glassman views the decline in oil prices as a major positive for India, China and other countries that consume more oil than they produce. “It’s a bit of a relief. So, there is a silver lining in some of this and we don’t think that oil prices are going to snap back very quickly. This is going to be an issue for a while, unless the Russians line up with the Saudis and cut output.”
Crude prices, which fell over 30 percent on Monday after Russia and the Organisation of Petroleum Exporting Countries ended their alliance, have rebounded slightly. As of today, Brent crude futures traded nearly 2 percent higher than the previous close at $37.85 a barrel.